Question

Mahesh and Suresh are partners and they admit Naresh into partnership. They agreed to value goodwill at three years' purchase on Weighted Average Profit Method taking profits for the last five years. They assigned weights from 1 to 5 beginning from the earliest year and onwards. The profits for the last five years were as follows:

Year Ended	31st March, 2015	31st March, 2016	31st March, 2017	31st March, 2018	31st March, 2019
Profits (₹)	1,25,000	1,40,000	1,20,000	55,000	2,57,000

Scrutiny of books of account revealed the following:​
(i) A second-hand machine was purchased for ​₹ 5,00,000 on 1st July, 2017 and ₹ 1,00,000 were spent to make it operational. ₹ 1,00,000 were wrongly debited to Repairs Account.  Machinery is depreciated @ 20% p.a. on Written Down Value Method.
(ii) Closing Stock as on 31st March, 2018 was undervalued by ₹ 50,000.
(iii) Remuneration to partners was to be considered as charge against profit and remuneration of ₹ 20,000 p.a. for each partner was considered appropriate.
Calculate the value of goodwill.

Answer 1

Particulars	Year	31st Mar., 2015(₹)	31st Mar., 2016(₹)	31st Mar., 2017(₹)	31st Mar., 2018(₹)	31st Mar., 2019(₹)
Profit		1,25,000	1,40,000	1,20,000	55,000	2,57,000
Add: Repairs on new machine wrongly					1,00,000
debited
Less: Depreciation on Machine (20% p.a.)					15,000	17,000
Add: Undervaluation of Closing Stock					50,000
Less: Undervaluation of Opening Stock						50,000
Less: Remuneration to Partners		40,000	40,000	40,000	40,000	40,000
Normal Profit/Loss		85,000	1,00,000	80,000	1,50,000	1,50,000

 

Year	Normal Profits (₹)	Weights	Weighted Profits (₹)
31st Mar., 2015	85,000	1	85,000
31st Mar., 2016	1,00,000	2	2,00,000
31st Mar., 2017	80,000	3	2,40,000
31st Mar., 2018	1,50,000	4	6,00,000
31st Mar., 2019	1,50,000	5	7,50,000
Total		15	18,75,000

Weighted Average Profits = `("Total of Weighted Profits"/"Total of Weights")` = Rs. `( [18,75,000]/15)` = Rs. 1,25,000

Goodwill = Weightes Average Profits x No. of Years of Purchase
= Rs. ( 1,25,000 x 3 )
= Rs. 3,75,000